Interest Only vs Principal & Interest — Which Is Better for Investors?
For investment properties, Interest Only (IO) is almost always the better choice. Here's why:
Current rates (2026):
- Principal & Interest (P&I): 6.39%–6.59%
- Interest Only (IO): 6.49%–6.79%
The IO advantage for investors:
- Lower monthly repayments (interest only, no principal reduction)
- Maximum tax deductibility (100% of repayment is interest = 100% deductible)
- Preserves cash flow for other investments or granny flat construction
- Property growth is driven by land appreciation, not mortgage reduction
Example on a $560K loan (80% of $700K):
- P&I monthly repayment: ~$3,540
- IO monthly repayment: ~$3,033
- Monthly saving: $507 ($6,084/year)
When to use P&I instead:
- Owner-occupied properties (no tax benefit from IO)
- SMSF loans (some lenders require P&I)
- When you want to build equity faster for refinancing
IO term: Typically 5 years, then reverts to P&I. You can refinance to a new IO term at that point.
LVR, Deposits & Lenders Mortgage Insurance (LMI)
Loan-to-Value Ratio (LVR) determines how much you can borrow relative to the property value:
80% LVR (Standard): 20% deposit required
- No LMI
- Best interest rates
- Most lender options
- Example: $700K property = $140K deposit
90% LVR: 10% deposit + LMI
- LMI cost: $15,000–$18,000 (can be capitalised into the loan)
- Higher interest rates
- Example: $700K property = $70K deposit + $16K LMI
Professional exceptions: Nurses, accountants, lawyers, and doctors can often access 90% LVR with NO LMI — ask your broker about professional packages.
95% LVR (VHF scheme): 5% deposit
- Only for first home buyers via Victorian Homebuyer Fund
- Government contributes 25% as shared equity
- No LMI required
- Example: $700K property = $35K deposit
Our recommendation: Aim for 80% LVR where possible. The $15K–$18K LMI cost at 90% LVR is dead money — better to wait 6 months and save the additional deposit. Exception: if property prices are rising $5K+/month in your target area, the LMI cost may be less than the price increase.
Borrowing Capacity & Couple Strategy
Rule of thumb: Borrowing capacity is approximately 5× your pre-tax annual income.
- $100K salary → ~$500K borrowing
- $130K salary → ~$650K borrowing
- $150K salary → ~$750K borrowing
Each $10K in annual rental income adds $50,000–$60,000 to your borrowing capacity. This is why a granny flat (adding $20K+/year rental income) can unlock $100K+ in additional borrowing.
Couple strategy for maximum borrowing:
- Put Property 1 in one person's name only (Person A)
- Person B maintains a clean credit profile with no debt
- Person B borrows for Property 2 using their full income + Person A's rental income
- Combined portfolio: 2 properties worth $1.4M+ on $260K household income
Self-employed borrowers:
- Need ABN registered for 18–24 months minimum
- Must be GST registered
- Need 1 year of draft financial reports showing net profit $95K–$110K+
- Bank of Melbourne specialises in trust and self-employed lending
Overseas income:
- Broker rates: 6.99%–7.29%
- Bankwest rates: 6.09%–6.29% (with verification)
- Most banks discount overseas income by 20–40%